A foreclosure notice hangs on the door of a foreclosed home in the 400 block of West 40th Street in Sioux Falls. / Elisha Page / Argus Leader

A foreclosed home on South Holbrook Avenue in Sioux Falls. / Elisha Page / Argus Leader

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Sioux Falls is struggling to shed the housing crisis that was at the core of the Great Recession, and city leaders are taking steps to limit any damage to neighborhoods that might result from the aftermath.

Home foreclosures in Sioux Falls jumped almost 20 percent last year compared with the previous year. The 251 foreclosures last year tied the number posted in 2008. In the four years since the financial crisis that was triggered by bad housing loans began, only 2010 saw more foreclosures, at 291.

Meanwhile, the number of vacant buildings registered with the city also was up sharply. Last year, 205 buildings were registered as vacant, up from 138 in 2011 and 89 in 2010, according to city records. Many of the vacated properties were the result of home foreclosures.

As a side statistic, many homes now in foreclosure or listed as vacant are owned by government agencies, with some stuck in a sort of limbo status as far as being placed back on the market. Some are in foreclosure, while others seem to have lingered for months for no apparent reason. That calls into question why those homes are not being placed back on the market faster, and how much the situation is costing taxpayers.

Mark Weber, an independent economist who has tracked the foreclosure market in Sioux Falls the past few years, recently offered statistics that suggest the housing crisis still has a grip on the city: In January 2012, there were 44 scheduled foreclosures. This January, there were 41.

“It’s still continuing,” Weber said.

That has city officials concerned. They have been monitoring foreclosures and their locations since the height of the economic downturn. Now, as the numbers of vacant properties continue to rise, they will enter a new phase of monitoring the properties and taking steps to ensure they don’t become dilapidated and bring down property values of nearby homes, said Kevin Smith, the assistant director of planning and building services.

“We’re feeling the ripple effects of the national mortgage crisis,” Smith said. “On the upside, a lot of our housing stock is not in a state of disrepair. Yet.”

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Ensuring that properties are maintained

Smith told councilors earlier this month that the city wants to be more vigilant about foreclosures, and it wants to reach out to mortgage lenders to ensure properties are being maintained. The longer properties stand vacant, the more likely maintenance problems will increase.

“We don’t want to do what other communities have done, and that’s just kind of wait,” he said.

In many situations, the city will work with federal agencies or federally guaranteed institutions that have acquired the properties because they guaranteed the bad mortgages.

The exact number of homes owned by the federal government in Sioux Falls and the surrounding area is difficult to pin down, given the churn of properties, deed transfers among lenders and new properties reverting back to the government.

Frustration over homes in federal hands

In Minnehaha County, the Department of Housing and Urban Development is listed as the owner of 18 properties. The city of Sioux Falls lists HUD as the owner of 19 vacant properties in the city limits, which includes homes in Lincoln County.

It can be frustrating for people who own property near a foreclosed home, especially if the foreclosures fall into disrepair. Joe Floyd of the J&E Cattle Co. noticed last year that one of the units in a four-plex where he owns two units in Tea was abandoned. The abandoned unit is on the end closest to the street.

The grass in front of the unit was overgrown, and Floyd said the “derelict” unit has damaged his ability to rent the two he owns. He learned the foreclosed property belongs to the federal government. He would buy or rent the foreclosure if he could, he said, but there’s a backlog of federally owned foreclosures.

“When you deal with the feds, you’re just dead in the water,” Floyd said.

“They didn’t attempt to take care of the property,” he added. “They turn off the utilities, lock the doors, slap a sign on it and leave. They have no financial incentive to do anything and probably no funds to do anything.”

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Federally owned homes not on market

Minnehaha County records show 28 properties are owned by the Federal National Mortgage Association — better known as Fannie Mae — and 11 more by the Federal Home Loan Mortgage — better known as Freddie Mac. Both Fannie and Freddie are under government control and have required a taxpayer bailout of almost $190 billion.

In addition, the Department of Veterans Affairs owns properties that it acquired through defaults in a loan guarantee program. A department spokeswoman said the VA has 49 such properties in the state, and Minnehaha County records show two in Sioux Falls. A third also is in the process of being transferred to the VA from the South Dakota Housing Development Authority.

Though federal agencies own a significant number of homes, few of them are being marketed. That leads to several questions: Why aren’t more of these homes on the market, have some fallen through the cracks, and how much is it costing taxpayers to “own” these homes?

Freddie Mac’s website that lists home sales has three in Sioux Falls, Fannie Mae is marketing 12 properties and HUD’s site is offering seven properties.

And the VA lists only three properties for sale in the state, even though it owns almost 50.

“VA strives to sell acquired properties at the best price and in the shortest time possible in order to assure effective recovery of the taxpayer’s assets in its administration of the loan guarantee program,” VA spokeswoman Meagan Lutz said in an email.

'Administrative backlog issues' often to blame

Mark Calabria, the director of financial regulation studies at the libertarian Cato Institute, said some states, known as “judicial states,” have laws that protect homeowners. South Dakota is one of those states.

In judicial states, homes will take longer to move through the process. Banks and lenders also have a lot of properties to contend with, although they have “scaled up” their operations on foreclosure since 2008.

“I do get the impression that there are some administrative backlog issues,” Calabria said.

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Rick Trapp, a broker with Realty Center, has listed 159 HUD foreclosures in Sioux Falls since 2010. Some properties are slower to get back on the market because banks lose paperwork. Still, he recently had seven new HUD foreclosures come onto the market, homes foreclosed last summer. “It just goes in spurts like that,” he said.

And he doesn’t see it slowing down.

“A lot of them are just sitting there, and we’re waiting for them to come up,” Trapp said.

On the plus side, “The majority of foreclosures are selling quickly,” he added.

The situation isn’t unique to Sioux Falls. Charles Corbett, a real estate lawyer in Sioux City, Iowa, and his wife thought about buying a foreclosed home that was empty in their neighborhood. When they toured the home, they found that pipes for the hot-water heat system had frozen and then ruptured. The entire heating system was a loss.

The home was owned by Fannie Mae.

“We went into it, and it was just horrible,” Corbett said.

“It was a neat house,” he added. “I sense that is something that happens: They’re not cared for.”

Slow process often starts with homeowner

Rick Sawvell, a broker with Hegg Realtors who lists home sales for Fannie Mae, said there’s good reason for slow turnover of foreclosed properties. It starts with a homeowner who is delinquent in payments for at least several months and maybe longer before a lender initiates foreclosure, Sawvell said. Once a property has been foreclosed at a sheriff’s sale, the homeowner still has 180 days to redeem a property.

If the homeowner cannot redeem the property by paying the delinquency, the property reverts to the entity or person who bought it at the sheriff’s sale, which usually is the lender. But even then, some residents will try to stay in the home. If that’s the case, then an eviction is required, Sawvell said. Others might declare bankruptcy.

“I’ve seen people live in their homes for two years and not make any payments,” Sawvell said.

On the other hand, some residents walk away as soon as they fall behind in payments. If that happens, a property might sit empty for months until a bank even begins the foreclosure process. And it will remain empty during the six-month redemption period. Then it will remain empty until a lender can get it back on the market and sold.

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It’s the long-term abandoned homes that worry city officials, Smith said. They are the ones most likely to deteriorate. Last year, the city ordered 21 structures demolished, and Smith doesn’t want that number to rise because of abandoned foreclosures.

Of the foreclosures last year, almost 30 percent involved the South Dakota Housing Development Authority, according to city data. The authority acts as a secondary market, like Fannie Mae and Freddie Mac, to finance loans through local lenders for first-time buyers.

In Sioux Falls, many state Housing Development Authority loans are insured by HUD, and once one of the HUD insured homes goes through the foreclosure process, including the redemption period, the property is deeded from the authority to HUD. Once it goes to HUD, it’s up to the federal agency to get the property on the market.

For properties that remain with the SDHDA, the authority strives to turn them around and get them back on the market as quickly as possible, said Brent Adney, the director of SDHDA’s homeownership programs. Letting it sit and “get run down” devalues the asset.

“Once it’s in our name, we have to move it as quickly as possible,” Adney said.